Pay off mortgage vs invest in stocks

Microsoft spinalcord
Sep 15, 2018 44 Comments

I'm wondering what's the best thing to do, whether to invest in stocks or pay towards my mortgage. Looking for suggestions. Thanks.

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TOP 44 Comments
  • Microsoft PromoMe263
    Over the course of your mortgage, investing in the market will most likely give you a higher rate of return than the interest you pay towards your mortgage. But if you will be able to sleep better knowing that your house is completely paid off, you should prioritize mortgage over investing in stocks.
    Sep 15, 2018 0
  • Citibank / R&D whatdabump
    Compounding interest will multiply your returns long term. Always invest first, especially given where interest rates are today and you plan on living in your home for many years.
    Sep 15, 2018 15
    • Citibank / R&D whatdabump
      Thanks!!! Yeah, I think holding on to cash is the right move for now. Housing will get crush along with the stock market if the panic comes anywhere near the level we saw 10 years ago.
      Sep 15, 2018
    • Microsoft PMM’d
      alternative to cash is short-term bonds with low risk (Es government or municipal)
      Sep 15, 2018
    • Citibank / R&D whatdabump
      But what about duration? How short or long without taking on too much risk of rate movement.
      Sep 15, 2018
    • Microsoft PMM’d
      I am thinking of holding the bonds till they mature, so at that point the movement on their price becomes irrelevant. It’s a better alternative to holding cash IMHO, if you’re fine with it being locked until the bonds are repaid.
      Sep 15, 2018
    • Citibank / R&D whatdabump
      Ah, got it. Thanks
      Sep 15, 2018
  • Oracle / Eng
    pycharm

    Oracle Eng

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    Control over your own life is an illusion.
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    Pay off mortgage 9/10 times
    Sep 15, 2018 3
    • Roku @roku
      This is not the usual advice
      Sep 15, 2018
    • Facebook public
      Terrible advice if you like money. Market returns 2x your interest rate.
      Sep 15, 2018
    • Amazon / Eng popopee
      Horrible advice
      Sep 15, 2018
  • Amazon / Eng Am A Bot
    I paid off my mortgage. With the new tax law, we don’t have enough deductions to itemize, so it makes less sense now than it used to.
    Sep 15, 2018 3
  • Microsoft spinalcord
    OP
    Isn't it true that over the course of the mortgage, we end up paying 3 times the loan amount? Esp with house loan of Abt 600k.
    Sep 15, 2018 3
    • Citibank / R&D whatdabump
      Run the same scenario over 30 years using a TVM calculator. 6% return to be conservative.
      Sep 15, 2018
    • New / Eng Aeon
      Because it’s over 30 years. The interests sounds like a lot, but almost any investment can more than triple your money over 30 years.
      Sep 15, 2018
    • Square / Eng SQ
      About 2x with current interest rates. And over 30 years that's nothing with inflation. Your mortgage payment now in 15 years is likely to be chump change.

      Look into investing: it takes 7.2 years to double money at 10% gain a year. You could 16x your money with relatively safe investments.

      Or you double every 10 years at 7.2% yearly gain. Again, you'd do 8x your investment in the 30 year period.

      You're not trying to hit it out of the park, but vanguard's should get you these returns yearly. Over 30 years it goes a long way.
      Sep 15, 2018
  • Salesforce 2438ez
    Ultimately there’s no one right answer. I recommend reading through this article and trying to decide for yourself: https://www.bogleheads.org/wiki/Paying_down_loans_versus_investing
    Sep 15, 2018 1
    • Amazon / Eng popopee
      +1 read this
      Sep 15, 2018
  • New / Eng Aeon
    Depends on your interest rate. If your mortgage is less than 5%, invest it.
    Sep 15, 2018 0
  • New / Eng b666
    Open excel and build some risk models: calculate ROI and best/worst case scenarios for RE in your area and stock. When chose the option that does not give you a heart attack from just looking at it.
    Sep 15, 2018 1
    • eBay CEbi00
      @b666 Can you give some pointers, or sample examples on how to build such risk models, so that I can make educated decision similarly
      Sep 16, 2018
  • Microsoft PMM’d
    The most rational approach is to look at the expected returns.

    1. Assuming a fixed rate mortgage for simplicity, let’s say your interest rate is 5%. This is 100% certain (if it’s variable, you’d have to assume a number and a probability). So the return here is 5%. Depending on your tax situation, it might be lower if you can deduct (some of) the interest you pay - in which case, keeping the mortgage might be more convenient. Let’s say your mortgage costs you 4.5%, then, factoring in the tax savings (which you’d have to calculate yourself)

    2. You’d need to calculate the expected return on the investment you’ll make. Let’s say you are 70% confident that you’ll get a 10% return in the next year. Your expected return is 7% (.7 * .10).

    In the example above, you’re better off investing in the stock market.

    However, it’s all about what you expect your ROI from the stock market to be. In 2017, the US stock market grew by a lot, and investing was definitely a better option. In 2018, it has slowed down and it depends on what you invest.

    This method above assumes that you’re acting in a perfectly rational way (what economists call a “homo economicus”). What isn’t included is the risk, and how you feel about carrying it. Investing in the stock market has a higher risk, and so you might feel better by choosing the safer option of repaying your mortgage.

    A way of reflecting that in the calculation is by altering the probabilities and seeing what is the minimum probability that still grants a positive return, and seeing if you feel comfortable with that. In the example above, investing in the stock market is the best approach as long as the probability of getting a 10% return is higher than 45%. Does that make you feel comfortable?

    Of course, you must run your own numbers.
    Sep 15, 2018 0
  • Gigamon / R&D klmno
    Investing in market v/s paying off mortgage is good as long as you have job/ money. In case of any issues, its better to have paid off mortgage than investment in market (which is too volatile). Peace of mind. Pay off soon and then invest in market. Assumption: this is your primary home/ first home.
    Sep 15, 2018 1
    • Microsoft spinalcord
      OP
      Yes it's my primary home.
      Sep 15, 2018
  • Netgear qFoQ32
    It’s your time horizon. Mortgage interest is tax deductible so depending on what you invest in, you need to calculate effective rate of return. For example, if your mortgage interest is 5% then after tax deduction, effectively you could be paying 3.5-4%. Any investment that gives you better returns is better.
    Sep 15, 2018 0
  • Amazon / Eng popopee
    My guess is your interest is really low on your mortgage. I would enjoy that low rate (probably 4%) minus tax deductions (minus 1%). Find an investment that beats the 3%, like s&p 500 (average 7%) and hold long term. Long term you are unlikely to lose. Short term there is greater risk.
    Sep 15, 2018 2
    • Amazon / Eng Am A Bot
      Tax deduction for mortgage interest only counts if you itemize and with the new tax law, itemized deductions need to exceed 24000 for filing jointly.
      Sep 15, 2018
    • Amazon / Eng popopee
      True. 10k of that can be covered in state income taxes. So just need 14k. Add charity, mortgage interest, childcare, etc I think its possible for a large portion of tech workers. Otherwise 4% is still very low and can easily be outperformed with conservative investments.
      Sep 17, 2018
  • Credit Karma 837272772
    To maximize returns you would pay interest only on your mortgage and invest the rest in the market.
    Sep 15, 2018 1
    • Netgear qFoQ32
      And that’s how, ladies and gentlemen, you start credit bubble of 2007
      Sep 15, 2018
  • Broadcom Ltd. rFkd21
    Whatever returns a higher rate, duh.
    Sep 15, 2018 0